Business Cycles in the Progressive Era and New Deal
Advocates for a moral economy felt they were on strong ground by arguing that recurrent business cycles were a part of the market economy and that replacing the market economy with the moral economy was necessary to avoid the damage those cycles caused in terms of the unemployment of workers and the underemployment of capital. Proponents of the market economy, however, would not have accepted this verdict. They did not ever argue that the market economy worked perfectly. We saw in Chapter 2 that William Graham Sumner recognized that the businesses that made up the market economy often made mistakes and misallocated capital. When those mistakes were large and spilled over into other industries, as was very likely in an interconnected market economy, a recession would result. The recession, however, would correct the mistakes that businesses made, albeit ruthlessly. The corrections of the business cycle were part of the economic process of weeding out bad businesses, that is, those that erred too greatly. In this chapter we shall continue to review the development of business cycle theory in the early twentieth century. Our focus is on individuals who looked at business cycles from the perspective of proponents of the market economy. They identified business cycles as part of the market economy but believed that they were an acceptable cost when compared to the advantages the market economy had for bringing about prosperity. Our starting point is with another of Sumner’s students, Irving Fisher.
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